Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plan
ID: 2584093 • Letter: L
Question
Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plants use recycled glass to produce jars that a variety of food processors use in food canning. The jars sell for $10 per hundred units. Budgeted revenues and costs for the year ending December 31, 2014, in thousands of dollars, are:
Kentucky
Pennsylvania
Total
Sales
$1,100
$2,000
$3,100
Variable production costs
Direct material
275
500
775
Direct labor
330
500
830
Factory overhead
220
350
570
Fixed factory overhead
350
450
800
Fixed regional promotional costs
50
50
100
Allocated home office costs
55
100
155
Total costs
1280
1950
3230
Operating income (loss) before tax
($180)
$50
($130)
Home office costs are fixed and are allocated to manufacturing plants on the basis of relative sales levels. Fixed regional promotional costs are discretionary advertising costs needed to obtain budgeted sales levels.
Because of the budgeted operating loss, Louisville Jar Co. is considering ceasing operations at its Kentucky plant. If it does so, proceeds from the sale of plant assets will exceed asset book values and exactly cover all termination costs; fixed factory overhead costs of $25,000 would not be eliminated. Louisville Jar Co. is considering the following three alternative plans:
PLAN B: Close the Kentucky plant and expand the Pennsylvania operations from the current budgeted 20,000,000 to 31,000,000 units to fill Kentucky's budgeted production of 11,000,000 units. The Kentucky region would continue to incur promotional costs to sell the 11,000,000 units. All sales and costs would be budgeted by the Pennsylvania plant.
Answer the following regarding Plan B
Note: Do not assume the Pennsylvania plant has the same costs per unit as the Kentucky plant.
1. What is the unit contribution margin for the Pennsylvania Plant? (carry out to four decimal places)
$__.__ __ __ __ per unit
2. What is the contribution margin ratio for the Pennsylvania Plant?
__ __. __% (carry to one decimal place, do not include the percent sign in your answer).
3. What is the contribution margin for the Pennsylvania (Louisville Jar Co's) plant?
4. What is the total cost to Louisville Jar Co. for their fixed factory overhead?
5. What is the total cost to Louisville Jar Co. for their promotions?
6. What is the total cost to Louisville Jar Co. for their allocated home office cost?
7. What is Louisville Jar Co's total operating income (loss) assuming they adopt Plan B? If a loss, include a negative sign before the number.
8. What is the overall impact to Louisville Jar Co's operating income if they implement Plan B. If it decreases operating income, include a negative sign before the number.
Kentucky
Pennsylvania
Total
Sales
$1,100
$2,000
$3,100
Variable production costs
Direct material
275
500
775
Direct labor
330
500
830
Factory overhead
220
350
570
Fixed factory overhead
350
450
800
Fixed regional promotional costs
50
50
100
Allocated home office costs
55
100
155
Total costs
1280
1950
3230
Operating income (loss) before tax
($180)
$50
($130)
Explanation / Answer
1.
Pennsylvania
Sales
$ 3,100
Variable production costs
Direct material
$ 775
Direct labor
$ 775
Factory overhead
$ 543
Contribution
$ 1,008
Contribution per unit
$ 0.0325
2.
Contribution Margin Ratio
32.50%
4. Total Cost for Fixed Overhead
Pennsylvania Factory
$ 450,000
Kentucky Plant
$ 25,000
Total
$ 475,000
5. Total Cost for Promotions
Pennsylvania Factory
$ 50,000
Kentucky Plant
$ 50,000
Total
$ 100,000
1.
Pennsylvania
Sales
$ 3,100
Variable production costs
Direct material
$ 775
Direct labor
$ 775
Factory overhead
$ 543
Contribution
$ 1,008
Contribution per unit
$ 0.0325
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